Archive for the ‘Eye on the Legislature, 2008’ Category

We reported that the budget hit to Iowa of coupling Iowa’s depreciation and Section 179 rules with the federal “stimulus” package would be about $33 million. Now we see from Tax Analysts ($link) that it’s $13.5 million.
Compare that to carpetbagging Google, which by one account has received tax breaks from Council Bluffs alone worth up to $48 million, not counting their state sales tax exemption; or to Microsoft, which will receive an identical bribe.
That’s our Legislature: a banquet to big, well-lobbied clients, but not even a bone to your business or your employer.

The “funnel day” for the Iowa Legislature has passed, and with passes the best chance to avoid a repeat of a costly mistake they made in 2002.
Bills that fail to pass a committee of either the Iowa House or Senate by funnel day are pretty much dead for the session. The legislators have failed to conform Iowa’s rules to the recently passed federal “bonus depreciation” and Section 179 changes. Unless they fix this by amending a bill that has already cleared the funnel, Iowa businesses will have to maintain separate depreciation records at their own expense. That won’t be the only cost to businesses; the Department of Revenue still is generating notices because it doesn’t seem to understand what happened in 2002; tax people have to charge their clients to set the Department straight.
The legislature is doing this because it doesn’t want to part with about $30 million of revenue. This is the same legislature that has given tax breaks to both Google and Microsoft. Meanwhile, tax collections are running about $400 million ahead of last year. If they are spending so much that they can’t spare $30 million to be shared by every Iowa business, they should all resign and go home before they do any more damage.
Related: GOVERNER GIVES MONEY TO MICROSOFT WHILE HOUSE STIFFS OTHER BUSINESSES

Governor Culver yesterday signed the big tax break for the server farm Microsoft has been dangling over the state. Meanwhile, the Iowa House yesterday passed two bills that show their attitude to the businesses that are already here.
The House passed a bill to exempt the federal individual tax stimulus checks from Iowa taxes yesterday (HF 2417). The bill doesn’t extend to Iowa the federal bonus depreciation and Section 179 asset expensing provisions of the federal stimulus package; nor does the “code conformity” bill passed yesterday in the House (SF 2123) that otherwise adopts federal tax computation rules to Iowa. In doing this Iowa repeats the mistake it made in failing to conform Iowa to similar provisions in the 2001 stimulus bill, a mistake that required a special session to only partially correct. As a result, taxpayers filing Iowa returns will have to keep different sets of fixed asset records for Iowa at their own expense. They will also have to pay for years of idiotic Department of Revenue notices that the differences between federal and Iowa taxes will cause.The Moral? The politicians love big, headline generating business openings, but they care a lot less less for the small businesses that don’t have lobbyists — the ones that pay the costs of running the government on behalf of Microsoft and Google.Related: The Race to Feed Microsoft

“It’s just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole.”

He doesn’t mention that their loophole closer will apply just as much to big multistate corporations headquartered in Iowa. Based on the combined reporting proposal that died last year in the legislature, it would work like this:
Consider two mythical corporations: Desmoinesco, Inc, a wholly owned subsidiary of Siouxfalls Corp. of South Dakota. 1% of Desmoinesco $1,000,000 sales ($10,000) are in Iowa. Its taxable income is $100,000.
Desmoinesco, Inc sells into a nationwide market. Siouxfalls Corp. has no Iowa operations and is not required to file an Iowa return under current law; its $4,000,000 sales are 25% each in Iowa, Nebraska, South Dakota and Minnesota ($1,000,000 each). Its taxable income is $400,000.
Without combined reporting, Desmoinesco’s Iowa taxable income is $1,000: 1% of its total taxable income.
If the factors are computed on a combined basis, Desmoinesco will report $5,000 in taxable income. Why? Because Desmoinesco’s 1% sales factor is applied to the unitary group’s $500,000 combined taxable income.
Now let’s turn the companies around, and pretend that Desmoinesco is the parent company, headquartered in Des Moines, and Siouxfalls Corp. is the subsidiary. The numbers work out exactly the same – a $4,000 tax increase for the company headquartered in Iowa (computations here).
So even though the politicians say they are just going after the big bad out-of-state companies (meaning “Wal-Mart”), they are also going after Meredith and every other big company with Iowa headquarters. If they keep it up, these Iowa companies might well someday become “big, out of state” corporations.

Iowa’s legislature has has finished its first month. Nothing much has happened with the Governor’s two big tax proposals, the bottle tax and the combined reporting proposal.
The noise this week mostly has to do with the federal stimulus bill. The governor promised not to tax the federal tax rebates on Iowa returns. He hasn’t committed to conforming with the business stimulus proposals, which has caused an outcry on the GOP side. It would be good policy for Iowa to conform with whatever Congress decides. The Department of Revenue still struggles with the effects of Iowa’s failure to conform right away with the 2001 stimulus package, and we still get notices from them for clients because the department can’t be bothered to read supporting schedules to 1040s that disclose differences between federal and Iowa depreciation.
It would be good if the legislature stopped there on the stimulus front, but there is also talk of doing more with sales tax holidays. These are bad policy for a number of reasons and should be eliminated altogether, rather than expanded. But if Iowa really wants to stimulate its economy long-term, they should try real reform of Iowa’s’ byzantine income tax.BILLS INTRODUCED
The bills introduced this week are, as usual, the opposite of tax reform. They include HF 2101, a 25% tax credit for businesses that hire math and science teachers to do math; HF 2102, which freezes property taxes on houses for some old folks, and SF 2084, which creates at least four different tax credits for “Green Buildings.” As if people wouldn’t save energy when oil is $95/barrel without a 1.4% Iowa tax break.
You can follow the progress of tax bills in this legislative session at our 2008 Iowa Tax Legislation page.

The Iowa Legislature is back in business, and once again we will be tracking tax legislation for you. Our chart of bills introduced in 2008 includes links to the text of tax bills, a brief description, and my guess as to each bill’s prospects. You can access it anytime from the “2008 Iowa Tax Legislation” link at the bottom of the blogroll on the right side of your screen.

So Iowa has the highest corporation income tax rate in the nation, 12%. We stand head and shoulders above Number 2, Pennsylvania, and its 9.99% rate. Why aren’t Iowa’s big corporations kicking and screaming about this?
Because they pay very little tax. Iowa corporations with multi-state operations can apportion their taxable income out of Iowa based on their sales. If a company that makes $100 million only has 1% of its sales to Iowa customers, it only pays the 12% tax on 1% of its taxable income. That’s true even it it doesn’t actually pay income tax in any other state. Other tax breaks, such as the refundable research credit, enable companies to pay little Iowa tax, or even to be net subsidy recipients.Source: 11/19/2007 Memo to members of Iowa Legislature. Click to enlarge.
Hungry for more revenue, Governor Culver has called for “combined reporting” to collect more revenue from multi-state corporations. Similar proposals have died in the last two legislative sessions, and this one probably faces the same doom. Why does a proposal to tax big bad corporations from out-of-state fail to move in a legislature controlled by Democrats?IT ONLY WORKS IF IT DOESN’T WORK
Iowa’s highest-in-the-nation corporation tax is tolerated only as long as it applies to nobody. In this way it is like the federal estate tax, which for many years was tolerated and relatively non-controversial, even with a crushing 60% top rate. This was because it applied to almost nobody because of the then-generous lifetime exemption, and because is was riddled enough with loopholes that it was almost optional. As inflation pushed the upper middle class couples into net worths over $1.2 million, the estate tax began to apply to actual voters, became very unpopular with the political donor class, and barely avoided repeal.
In much the same way, effectiveness could be very dangerous for the Iowa corporation tax. Our overall tax structure is already generally regarded as hostile to business. A 12% rate that actually applied would keep all but the most easily-bribed businesses from locating here.IS IT WORTH IT?
Only 5% of Iowa’s tax revenue comes from the corporation tax – $320 million in the most recent fiscal year.
The Des Moines Register reports that the state has agreed to provide economic development tax credits of $444.8 million since 2003. This only counts specific credits that are run through the Depearment of Economic Development. It doesn’t include the refundable research credit. It also, I believe, omits historic rehabilitation credits. Of course the state has to maintain an examination function to collect the corporation tax. Given this, maybe Iowa could repeal its corporation tax without much revenue loss if it got rid of all of the corporate welfare tax credits at the same time.. If we still need to make up some revenue, get rid of the stupid $25 million “Iowa Power Fund” and the $50 million “Grow Iowa Values” fund giveaways.
There are logistical problems with a corporation tax repeal – principally the problem of S corporations, whose earnings are taxed directly to shareholders returns. Perhaps these companies could elect to be taxed as C corporations for Iowa, with shareholders paying Iowa tax only on their distributions.
If our lawmakers were smart, the debate this session would be over the continued existence of the corporate tax, and whether a 0% corporate tax would be better for economic growth than the dozens of economic development tax credits that function as a great corporate welfare scheme. But they aren’t , so they will instead be talking about “closing loopholes” in a tax that shouldn’t exist in the first place.

The Des Moines Register reports that Governor Culver will propose doubling the state’s five cent bottle deposit, but with a new twist: you would pay a 10-cent deposit, but you only get eight cents back when you return the empties. One cent would go to the retailer, and the 10th cent would go to the state.
This is part of the treatment for the fiscal hangover left by last year’s spending spree. It’s sad that so much effort is being spent on a penny-ante tax scheme when the Iowa really needs to tend to its dysfunctional revenue system. Every aspect of Iowa’s tax system is a mess, from our highest-rate-in-the-nation corporate income tax to our property tax. Yet our lawmakers only seem interested in making it worse with more targeted tax credits, while trying to patch things up with stupid things like this penny bottle tax.
What’s even sadder is how much could be accomplished by wiping the slate clean of our dozens of targeted tax breaks, especially on the corporation side. Economist Martin Sullivan points out ($link) that Iowa such a high “leakage” from its 12% corporate rate that a better designed corporate tax could have a rate around 3% with no revenue loss. With some modest reduction in state spending – like getting rid of the useless “Grow Iowa Values” corporate welfare scheme and the ridiculous Iowa Office of Energy Independence – you could get rid of the corporate income tax altogether. It’s hard to imagine “Grow Iowa Values” will attract more business to Iowa than a 0% corporation tax rate would. But what would “economic development officials” do with their time then?

The Iowa Legislature opens its 2008 session this morning. As the session starts, the big tax fights are likely to be over sales taxes and vehicle registration. The Quad City Times lists these tax issues among items likely to see action this year:

— Road construction funding: The Legislature also will be looking at dealing with an estimated $200 million annual shortfall in funding for road construction and maintenance. Culver has ruled out the idea of raising Iowa